By now, you should have received your year end statement from your advisor or broker and perhaps you have reviewed it and had a conversation. In the first two weeks of this new year (2023) I have had several conversations with other financial advisors and have read a lot of commentary by various “experts” in our field. So far, nearly all of the advisors have told me that they simply stayed with a buy-hold-rebalance style (commonly referred to as asset allocation) investment strategy throughout 2022. That’s didn’t work out too well for their clients because stocks were down more than 18% and U.S. bonds dropped by more than 13%; the typical balanced portfolio of 40% bonds and 60% stocks was down about 16% for 2022.

At D. Scott Neal, Inc. we saw structural changes taking shape in 2021 and materializing in the first half of 2022. Geopolitical power shifts, unprecedented debt levels, shifting population demographics, new technologies, decades of loose monetary policy, and high inflation have permanently altered the investment world. As a result of these seismic economic changes, we made significant updates to our portfolio allocations, risk controls, and modeling in the first half of 2022.  For those clients who went along with our strategy (or gave us complete discretion to do so) we had the new, more active, strategy implemented by June. 

As you may recall from our previous writing about this, we blended our two long term strategies (wealth preservation and momentum growth) into one and varied the amount of each according to a client’s specific risk profile.  Risk profiling is a combination of risk tolerance and risk capacity.

We added several individual stocks along with some inverse ETFs (those that go up anytime the market index falls) to our portfolios. In our attempt to address ways to moderate the riskiness that we saw, we also paid close attention to the size of each investment (i.e. that portion of the total portfolio invested in any one individual investment) and how the size could impact risk and return. Picking a specific number of shares to add to the portfolio has an impact on total return as well as risk.

Since making these changes, the D. Scott Neal, Inc. model portfolio has enjoyed a much smoother ride than a traditionally allocated portfolio or the markets themselves.

Outlook

 We anticipate a recession in 2023 and we are well positioned to take advantage of it should that happen.  (We hope that we are wrong about that.)  However, if that comes about, it will put a lot of stress on those investment managers who are holding tightly to the notion that simply buying the dips (or buying and periodically rebalancing) is enough to ensure that their clients’ portfolio will be okay. Instead, we prefer a more adaptable approach that will minimize risk over the largest set of possible circumstances.  For those clients who let us, we have positioned their portfolio accordingly.  While we model what we think will be best, we are keeping our eye on the data and can make changes as the world unfolds in unanticipated ways.

We look forward to having conversation with you about your goals and how our work together can improve your chances of achieving them. In our next post we will be looking forward to next steps along this journey. Hope you will join me then.     

Data security is a must these days. Protecting yourself is a personal responsibility

If you have never looked at your credit report, you are not alone. If that is the case, now is certainly the time to do so. At a minimum, take advantage of the once a year free credit report. You need to know that your report contains the most intimate details of your financial life. The Equifax hackers likely stole social security numbers, birth dates, current and prior addresses, perhaps driver’s license numbers, and even nicknames.

In short, the stolen information is enough to impersonate you. I regard that as the chief risk from this attack. The hackers themselves are likely to sell your data to other criminals who want to do just that.  The criminals can then open new accounts in your name, obtain a driver’s license, or worse.

There are steps that we believe you should consider taking now.

1) Freeze your credit with all three credit reporting agencies:

Equifax                866-349-5191                 www.equifax.com

Experian              888-397-3742               www.experian.com

TransUnion        888-909-8872               www.transunion.com

Each of them has a slightly different process for implementing the freeze, and you must do it with all three. The downside to a freeze is that you will need to have the freeze lifted if you apply for new credit.  Keep in mind that it may take a few days for a request to lift the freeze to become effective.  There may be nominal fees associated with this service, usually $5-$10 each time you put it on or have it lifted.

2) Put fraud alerts on your credit bureau accounts.

This can usually be done directly with one of the reporting agencies, and I have been told by an Experian rep that putting it on one bureau will spread it to all three.  It is free but is only good for 90 days before it has to be renewed.  The fraud alert works differently than the freeze or other monitoring services. The credit bureau will notify the credit issuer that a fraud alert exists. It is up to the creditor to take further action.

3) Utilize a membership Credit Check & ID monitoring service.

Equifax is offering their service for free for a limited period due to this breach. Originally, they required customers to waive legal rights to sue, but that has since been lifted. Experian and TransUnion have similar services.  The downside to credit monitoring, in my opinion, is that it reports an incident after-the-fact. Granted, the more robust services offer near-immediate alerts, but it is still after-the-fact notification.  It is also not inexpensive to have all three bureaus monitored on a daily basis.  Your financial institution may offer such a service on a discounted basis. It is worth checking with your bank.

4) Utilize a spending planner / monitor that provides alerts.

Downloading into Quicken or Mint.com and reviewing transactions frequently can also help you detect anomalies in existing accounts.  For those who are using the spending module of the D. Scott Neal, Inc. website, alerts can be set to monitor large expenditures. The amount that constitutes “large” is user defined.

Like credit and ID monitoring, these are also after-the-fact and require considerable attention and fast action when something shows up.

Even if this breach of Equifax never results in your data being used fraudulently, it is a wake up call for all of us to be on alert. Cybersecurity should become a very high priority for all of us. I will publish more about how to hack-proof your life in future editions of the blog. Meanwhile, scroll down and leave a comment or question.